Contemplating a harsh winter, can Europe look forward to a brighter spring?

A blog by Falco Weidemeyer, EY Global Turnaround and Restructuring Leader

The Great Frost was an extraordinarily cold winter in Europe in 1708-09. Crops were ruined, grain prices soared, and many communities were faced with a dire fight for survival. Per capita gross domestic product dropped by 23% in the UK, and did not fully recover for another 10 years, all from a single terrible winter. Similarly, the Big Freeze of 1962-63 led the United Nations to note in its World Economic Survey that “In western Europe, the growth of industrial production in 1963 generally fell somewhat short of expectations at the end of 1962: the winter was a severe one over much of the area and prolonged unfavourable weather delayed the realization of building plans and depressed output in related industries.”

Maybe the people of Europe thought they were over such vulnerabilities to a harsh winter. But that is looking less likely today with Europe in looking forward to what is widely expected by politicians, policymakers, business owners and consumers to be another very difficult winter due to energy costs, particularly gas, exacerbated by the war in Ukraine. While prices have come off their 2022 highs, they are still running at 10x the pre-pandemic average for 2018-19.

Source: EY Knowledge analysis and S&P Capital IQ

In its most recent analysis, the Organisation for Economic Co-operation and Development (OECD) comments that “without sufficient supply diversification and orderly demand reductions, shortages could push up global energy prices, hit confidence and financial conditions and require a temporary rationing of gas use by businesses. Taken together, these shocks could reduce growth in the European economies by over 1¼ percentage points in 2023, relative to baseline, and raise inflation by over 1½ percentage point. This would push many European countries into a recession in 2023.”

Expectations for growth are continually being downgraded for the near-and-mid-term; expectations that inflation will remain elevated are being pushed out further. Both corporate and consumer confidence have declined across the continent, with the main area of concern centred on Germany, the economic powerhouse underpinning much of Europe’s growth in the past decades.

There are worrying signs emerging that the current multiple crises could cause long-term damage that will continue to reverberate through the economy and cause wider social harm. Across Europe, more aluminium smelters are powering down, with close to 1 million tonnes of European primary aluminium capacity now offline and more likely to follow as this power-hungry sector struggles to cope with soaring energy costs. Energy-intensive industries employ an estimated 8 million workers in the EU. Some companies in sectors like steel, chemicals, glass, ceramics, paper, and construction materials are having to reduce or suspend production, switch to night-time production or shutter sites. This also has knock-on effects on integrated supply chains and on the wider regional economies that benefit from the high value jobs in their area.

Beyond the immediate need to keep the lights on; keep operations and the economy churning; keep people employed; and keep people fed, housed, warm and safe, this is the big long-term vulnerability for Europe. The economic devastation that can occur beyond the gates of a single factory closing is well known from the deindustrialization that occurred during the 1970s and 80s. Whole regions were denuded of high wage jobs and took decades to recover, with some areas still depressed.

Short-term measures, like the proposed electricity price intervention and caps on the price of gas, will help. But the focus should be on protecting these industries for the long term, through helping them accelerate their transition to more sustainable and secure forms of energy.

The European Union’s REPowerEU plan lays out a road map for rapidly reducing the EU’s dependence on Russian fossil fuels. It also aims to accelerate the clean energy transition by speeding-up and scaling-up renewable energy in power generation, industry, buildings, and transport.

It will be through accelerating the deployment of funds from this plan that Europe can look forward to a brighter future. But time is of the essence. If Europe is to emerge from a harsh storm not of its own making toward a brighter future, it needs to learn the lessons from the past.

The danger is that if businesses, employees, and wider society do not feel that governments are supporting them through this period of deep uncertainty. Governments showed they could provide comprehensive support during the COVID-19 pandemic. If they fail to replicate that policy now, there will be a risk of serious social revolt, which coupled with the economic fallout, will have dire consequences for social cohesion.

For companies and business leaders there are multiple implications. But there are immediate steps they should consider now:

1) Intensify dialogue with politicians to influence the necessary interventions and derive actions for their company to fully participate in solutions for these challenges.

2) Identify the impact of these developments and integrate into strategic and tactical agendas.

3) Adapt strategic perspectives as well as reframing resilience programs and portfolio reviews.

4) Define the necessary defensive actions that need to be taken now to protect or accelerate growth opportunities.

5) Be guided by a new definition of success to include social, ecological, and geopolitical aspects.

As energy prices are likely to remain at elevated levels, and with uncertainty looking set to be a constant feature of the global economic and geopolitical landscapes for the foreseeable future, CEOs and business leaders need to engage in actions that will enable them to navigate the multiple headwinds they currently face, while also looking to build a more sustainable and resilient future.

The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other member firms of the global EY organization.